What is the theoretical value of a company's stock that:
- has earnings of $1.50 per share,
- Dividend payout ratio of 33%,
- has a perpetual earnings growth rate of 9%,
- Cost of equity of 9%,
- After-tax Cost of debt of 5%, and
- Financial Leverage of 2.1x
First person who comments on this blog post with the right answer wins a free lunch / dinner at Sushi on Bloor on me. If you are outside of Toronto, we can think of some other prize of approximately equivalent value (let's say $20 CND).
Comment on the blog for your official submission.
13 comments:
Hey Josh, figured its around $20.11/
That's not the answer I have in mind, but I'd like to see how you got to your answer! :)
Trick question, perpetual EPS growth rate has to be lower than discount rate.
its dicey man, my bad..
-18.45
OH CHAD!!! You're SO CLOSE! Why does EPS growth have to be lower than discount rate? And what is the implication if it isn't?
it would be negative no? I've never heard of a negative earning per share... (if that really is the EPS you are talking about)
Awesome! So close Meg! I can tell you applied the dividend growth model formula.
The model usually makes sense right (aka gives us prices greater than zero). So why is it giving us a negative number? Look at what Chad said as a hint.
What assumption has caused our model to break? Think about present value of cash flows.
EPS growth rate < Discount rate otherwise the price would be infinite based on the perpetuity formula.
the required return, or discount rate, for an investor comes from dividends plus growth of stock value.... r=Div/Price+g ...since dividends are positive, g must be smaller than r...and it wouldn't make sense for someone to expect to get a return that's lower than the rate of growth
-18.45 was my response too hahahah been a loooong time since I last did this stuff...pulled out my finance books for curiosity...don't even know if the right formulas were applied, which is shocking since I deal with stocks everyday
Ding ding ding! Chad gets the answer! I'll write a post shortly about the answer!
you are all wrong. the answer is 7
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